Franchise agreements often include non-compete clauses which prohibit the franchisee from carrying on any other commercial undertaking on the market for which the franchise agreement has been concluded. These non-compete clauses are generally subject to competition law, as their effect is to restrict the franchisee's freedom of business activities and to prevent other franchisors from distributing their products or services through the franchisee. Article 81(1) of the EC Treaty prohibits agreements between undertakings which may affect trade between EU member states and which have as their object or effect the prevention, restriction or distortion of competition within the common market. In its 1986 decision in the Pronuptia Case(1) the European Court of Justice (ECJ) ruled that provisions in franchise agreements which are essential in order to prevent the franchisor's competitors from benefiting from the know-how and assistance which it makes available to the franchisee do not constitute restrictions of competition for the purpose of Article 81(1). This also applies where the franchise agreement prohibits the franchisee, for the duration of the contract and for a reasonable period after its expiry, from opening a shop of the same or a similar nature in an area where he or she would compete with a member of the franchise network
However, Article 5(a) of the EU Block Exemption Regulation on Vertical Restraints (2790/99) prohibits non-compete clauses which exceed five years in duration. The question with which the regional courts of Hanover and Frankfurt were recently faced was whether this provision also applies to franchise agreements.
The parties concluded franchise agreements containing non-compete clauses that applied for the full duration of the agreements, which stood at 10 years. The franchisees argued that the clauses were invalid on the grounds of Article 5(a) of the Block Exemption Regulation on Vertical Restraints.
The regional courts ruled that the clauses were valid. They argued that the clauses would not have an appreciable impact on competition due to the franchisors' small market share (less than 1%). In addition, the courts held that in the case of franchise agreements, non-compete clauses are necessary to maintain the common identity and reputation of the franchised network, and to protect the know-how made available by the franchisor. The Regional Court of Hanover made particular reference to the European Commission Guidelines on Vertical Restraints, which take the same approach (2000/C 291/01, at point 200).
The decisions are in line with ECJ case law and in particular with the reasoning in the Pronuptia Case, on which the commission guidelines are based. It has once again been made clear that franchise agreements do not fall under the general rule laid down in Article 5(a) of the Block Exemption Regulation on Vertical Restraints.
The regional courts did not have to consider the possible invalidity of non-compete clauses that cover time periods lasting beyond the expiration of the franchise agreement. The Pronuptia judgment seems to indicate that the ECJ would consider such clauses to be compatible with Article 81 of the EC Treaty, while the commission guidelines seem to suggest the opposite.
For further information on this topic please contact Karsten Metzlaff or Karl Rauser at Nörr Stiefenhofer Lutz by telephone (+49 30 20 94 20 00) or by fax (+49 30 20 94 20 94) or by email ([email protected] or [email protected]).
(1) Case 161/84, ECR 1986, 353 (January 28 1986).